Tax Planning and SR&ED

I’m often amazed that some Canadian technology companies spend a fortune on complex tax planning structures and ignore rudimentary compliance functions to support SR&ED tax incentives.

While SR&ED is becoming more difficult and less predictable, it is still the best deal around for companies investing in new and improved technologies. The benefits of claiming SR&ED successfully will generally dwarf most other tax planning strategies for early stage technology companies in Canada – particularly those with 100 or fewer employees.

In the example above, a small tech company with a 20 person development team – has $750 K in eligible costs. If planned and documented properly, the company should be entitled to a $482 K tax refund.

If they aren’t careful in managing their expenditure limit, the refund could be reduced to $ Nil – and they would restricted to claiming SR&ED against taxes otherwise payable. (cost $209 K to $482 K)

In the 3rd scenario, when the company doesn’t adequately document SR&ED activities, it loses all entitlement to SR&ED tax incentives. (cost $482 K)


Most companies with a 20-person development team has some form of documentation. For a software company that might mean project management software, source code repositories and/or timesheet systems.

What they don’t have is documentation of technological uncertainties faced – and how they attempted to address these. The fact is that businesses engage in R&D to build and improve products or services. They aren’t really interested in overcoming technological uncertainties – except as a by-product of their product development work.

It makes much more sense to use existing – proven – technology to build new products. Extending and/or enhancing the underlying technology is risky business. That is precisely why the SR&ED program was introduced. It was designed to help share the technological risk with innovative companies.

In order to qualify for SR&ED tax incentives, companies must be able to identify which technological uncertainties they faced – and how they attempted to overcome them. However in our experience companies do a lousy job of documenting the technological uncertainties (“TUs”) they faced. Instead they focus on functions and features that they successfully developed.

That is the biggest single problem that the CRA finds with SR&ED claims. A decade or 2 ago the CRA would do their best to infer the technological uncertainties from the product improvements described in the SR&ED claim. These days however, CRA’s technology advisers not only expect TUs to be specifically identified, they expect documentation to describe how and when a specific uncertainty was identified and how eligible costs claimed relate to the attempt to resolve the uncertainty.

This is problematic for businesses that wouldn’t otherwise consider an “activity-based costing system”:

Introducing activity-based costing is not a simple task—it is by no means as easy as ABC. For a start, all business activities must be broken down into their discrete components. As part of its ABC programme, for example, ABB, a Swiss-Swedish power company, divided its purchasing activity into things like negotiating with suppliers, updating the database, issuing purchase orders and handling com-plaints.

Large firms should try a pilot scheme before implementing the system throughout their organisation. The information essential for ABC may not be readily available and may have to be calculated specially for the purpose. This involves making many new measurements. Larger companies often hire consultants who are specialists in the area to help them get a system up and running.

The easy approach is to use ABC software in conjunction with a company’s existing accounting system. The traditional system continues to be used as before, with the ABC structure an extra to be called upon when specific cost information is required to help make a particular decision. The development of business accounting software programs has made the introduction of activity-based costing more feasible.

The Economist – June 29th, 2009

Obviously the latter approach is the only viable option for small technology companies.

We have designed a custom form that can be modified for our clients, to log TUs encountered by senior technical staff during the course of product development activities. In the video that follows I describe the form can be designed and modified using Smartsheet™.

Once built the form can easily be incorporated into a simple ABC system, layered on top of a traditional accounting system, and used for tracking SR&ED expenditures.


Finance Minister’s Advisory Panel on Economic Growth Report Based on Flawed Analysis

On February 7, 2017 Canada’s Advisory Council on Economic Growth Released its report:


Unfortunately at least one of the key underlying assumptions is demonstrably false and therefore may have led the council to reach the wrong conclusions. Specifically:

“Small firms account for about half of business sector employment in Canada versus just over one-third in the United States.” – see page 4 of the report

I suspected that this assertion was false based upon my analysis in 2012 when I was setting up my own accounting practice.  At that time I took a look at US and Canadian statistics for employment and firm size in 2012, in order to gain a better understanding of the market. Surprisingly, the results showed me that the 2 countries were very similar. Predictably, the US had more very large businesses, at least in absolute terms. However there was also a relatively larger number of self-employed persons in the US.

Interestingly the US Census Bureau excludes nonemployer firms from their analyses:

“Nonemployer Statistics is an annual series that provides subnational economic data for businesses that have no paid employees and are subject to federal income tax. The data consist of the number of businesses and total receipts by industry. Most nonemployers are self-employed individuals operating unincorporated businesses (known as sole proprietorships), which may or may not be the owner’s principal source of income.

 The majority of all business establishments in the United States are nonemployers, yet these firms average less than 4 percent of all sales and receipts nationally. Due to their small economic impact, these firms are excluded from most other Census Bureau business statistics (the primary exception being the Survey of Business Owners). The Nonemployers Statistics series is the primary resource available to study the scope and activities of nonemployers at a detailed geographic level. For complementary statistics on the firms that do have paid employees, refer to the County Business Patterns. Additional sources of data on small businesses include the Economic Census, and the Statistics of U.S. Businesses.”

The definition of small business is also troubling and likely outdated. If you define small and medium enterprises (“SMEs”) as having fewer than 500 employees, you are left with a very small number of large businesses. In British Columbia, BC Stats uses 50 or more employees as the cut-off for large businesses. Using this definition, and including “non-employer firms”, there is virtually no difference between US and Canadian statistics:


Based upon their flawed analysis the Advisory Council infers that:


“This lack of scale accounts for 20 percent of the labour productivity gap between Canada’s business sector and that of the United States.”


The Finance Minister’s Advisory Panel appears set to re-visit programs that benefit early stage technology companies and re-allocate resources to favour larger companies, universities and venture capitalists – presumably after input from these groups – and with almost no input from startups and early stage companies.

It is precisely these larger companies, universities and venture capitalists that are not performing.

Commercialization is critical – but it won’t be achieved by rewarding institutions that have failed to deliver in the past.

Open Letter to The Minister of Innovation, Science and Economic Development

I understand that your Minister of Science launched a review of innovation policy on June 13th of this year, and that you are now responsible for that review.

As a CPA and income tax practitioner my clients will be very much affected by changes to Canada’s existing policies designed to encourage innovation. I am a member of an ad hoc CATA “LinkedIn Group”. As such I am aware of lobbying efforts being made by CATA to your Ministry.

I feel that I must point out to you that CATA does not represent the vast majority of my clients and that while their lobbying efforts have some merit, you should not believe that they necessarily represent the best interests of the entire community.

They are presenting your Ministry with a complex suite of recommendations and seeking validation from members using online petitions. As you would expect, their petitions overly simplify the situation, making it much easier for busy executives to “just say yes”.

I have reproduced their most recent online questionnaire below:

I cannot in all conscience respond to this survey. It appears that my only option is to reply “Yes”. Any attempt at a “nuanced” response, will presumably be ignored, since they have already determined what their proposals are.


The small, early stage companies that I typically represent are very seldom members. Large CPA firms are well represented. In fact, CATA’s key spokesperson is Dr. Russ Roberts, a former partner at Deloitte, LLP.

So while CATA’s views are certainly worthy of consideration, they do not represent my clients or their needs. I therefore urge you to tread carefully when conducting your review.

New “Refundable” Tax Credits for Startups in US.

The US introduced a new “refundable” tax credit for startups. Commencing in 2017, companies will be able to apply up to $250,000 to offset payroll withholdings on behalf employees.

According to Miller & Chevalier, CPAs:

For purposes of the credit, a “qualified small business” is an employer with gross receipts of less than $5 million in the current taxable year and no more than five taxable years with gross receipts.  Qualified small businesses may claim the R&D payroll tax credit in tax years beginning after December 31, 2015.


business-incentives-us-statesIt appears that the applicable amount of the federal credit is capped at $250,000 per year – for a maximum of 5 years. The effective amount of the benefit federally appears to be about 10% of qualifying wages (“QREs”) – compared with 54.25% in Canada. If QREs exceed $1 million Canadian, the percent will start to decline. State incentives for R&D include job credits, R&D tax credits and a variety of investment credits.

Hopefully Canada’s Federal Government will take this into account in their review of supports for the knowledge-based industry ecosystem.

Federal Government is Reviewing Effectiveness of SR&ED

Old style politicians tend to prefer direct funding programs because they can trumpet their successes – in other words they provide photo opportunities. Since direct funding programs generally involve a selection process, that also provides opportunities for politicians to sell their influence.

That simply isn’t true for the SR&ED program, since tax information is confidential – and taxpayers have a right in law to funding if the meet the eligibility requirements.

In the current review of the effectiveness of different approaches to encouraging innovation, some key voices are speaking out against SR&ED and other so-called indirect programs. This began a number of years ago with the Jenkins Report and other conservative voices in academia and the business press. Too many of these pundits confused Adam Smith’s “invisible hand” with “the hand of God”.

While there clearly are issues with the way the administration of the SR&ED program has evolved, it is still a valuable program – particularly for early stage technology programs. Finding effective ways to fund growing businesses has always been difficult. According to an article published by

…less than 1% of startups are funded by angels or VCs. The article points out that startups are 3 times more likely to rely on crowdfunding than they are to attract arm’s-length investors…

So how well does equity crowdfunding work?

On April 5, 2012 President Barrack Obama of the United States signed the JOBS Act into law with a remarkable level of bipartisan support.  The intent was to update the U.S. Federal Security laws and make it legal for entrepreneurs to use crowdfunding to raise a limited amount of early-stage equity-based financing. Congress gave the Security Exchange Commission 270 days to draft the rules necessary to implement the legislation.

However it wasn’t until May of 2016 that crowdfunding portals in the US were open to anyone other than “accredited investors”.  A few months earlier – in February of 2016 – the BC Securities Commission introduced regulations that allowed startups to raise small amounts of money from BC-based Crowdfunding portals…


A quick review of the National Crowdfunding Association of Canada’s directory (see above) reveals just how much this resembles the wild west. Many of the BC portals have abandoned their websites, some portals have no listings – and the busiest I found showed a single active listing, along with many “future listings”.

One of the equity portals listed – – has already pivoted away from its origins as an equity crowdfunding portal:

“We have evolved to be better aligned with the needs of these companies and the investors wanting to back them by focusing our efforts on a lead investor, member network model. As a result of these changes, we are no longer operating as a crowdfunding portal.”

Given the current state of flux in this sector, it may be wisest for early stage companies to look at crowdfunding as a way to launch creative content (eg. video games or internet-based tv series) or new products using Kickstarter or Indiegogo…

The upfront compliance and regulatory costs associated with equity crowdfunding are very high. Admittedly it costs less than going public, however existing equity crowdfunding portals don’t appear to have much, if any traction. As a result those upfront costs will almost certainly be stranded.

In BC where I practice, small business (50 or fewer employees) accounts for 55% of private sector employment (Source: BC Stats – Small Business Profile 2016). If politicians want photo opportunities and political donations, it makes sense to focus on direct funding approaches. If they want the economy to work, they should support and enhance the SR&ED program.

Ontario Budget Reduces SR&ED OITC

The February 25, 2016 Ontario Budget introduced changes to the provincial SR&ED program. The Ontario Innovation Tax Credit (“OITC”) was reduced from 10% to 8%. At the same time the non-refundable ORDTC was reduced from 4.5% to 3.5%.

While the combined R&D credits (11.5%) are still nominally greater than those offered by most provinces, for early stage companies facing startup losses this will hurt a little. While Ontario’s neighbour to the east – Quebec – also reduced their incentives recently, their incentives are significantly more lucrative.


Asset Sale vs Share Sale

Technology companies – in fact most small businesses – often have difficulty taking advantage of the recently enriched lifetime capital gains deduction. When first introduced the capital gains deduction was targeted the first $500,000 of capital gains on family farms and qualified small business corporation shares (“QSBCs”). Since then the lifetime capital gains limit has been increased to $806,800 for QSBCs and $1 million for family farms.

However it is always difficult for sellers to sell shares. Buyers prefer to buy assets for 2 reasons:

  1. The cost of shares is not deductible by the buyer against income – while most assets are at least partially deductible
  2. Shares of small business corporations are much more complex beasts to acquire and may include undisclosed  liabilities or other “surprises” that buyers are understandably nervous about acquiring

Buyers and their legal representatives will typically discount the purchase price if the vendor insists on selling shares. In some cases buyers simply won’t consider acquiring shares.

Many small, private corporations have at least a few skeletons in their closets. Closely-held companies often operate a little too close to the line and sophisticated buyers will often engage professionals to uncover at least some of these.

As a former senior manager with PwC LLP in Vancouver I was seconded to a due diligence team looking at the potential acquisition of a technology company. As it happened, the target company was one of a number of companies owned by the same entrepreneur. The entrepreneur had separate accounting firms handling each of his companies.

The problem was that he never informed his accountants of the existence of the other companies. Each year he filed for refundable SR&ED tax credits with one of his companies. Presumably his accountants were unaware of the existence of these other companies, since they were not disclosed on the tax returns as “associated” corporations.

Because of the amount of taxable income of the associated group, the corporation would not have been entitled to high-rate refundable tax credits. Thus any purchaser could be on the hook for undisclosed tax liabilities – and penalties – in the millions of dollars.

Of course it isn’t only undisclosed tax liabilities that could surface after an acquisition. There could be problems with employees, former employees, customers or suppliers. With small corporations eligible for the lifetime capital gains exemption, financial statements are often merely compiled with little or no assurance from the public accountants drafting the statements.

For that reason most accounting and legal professionals will advise buyers of QSBCs to purchase assets – or to discount the purchase price and conduct significant due diligence before determining that price.


Technology entrepreneurs looking to sell their companies should understand that the value of their companies is most often determined by the value of their IP.

Eligible capital property of a business is intangible capital property, such as goodwill and other “nothings”, the cost of which neither qualifies for capital cost allowance nor is fully deductible as a current expense in the year of its acquisition.

Selling intellectual property developed by a technology company results in a gain on disposition of eligible capital property. These types of gains are similar to capital gains – in that only 1/2 of the gain is taxable. The remaining un-taxed half  can be distributed tax-free to shareholders via an amount paid out of the capital dividend account (“CDA”).

So rather than selling shares – typically at a discount – the entrepreneur keeps the company and sells the IP within the company. So the sale price is higher, the sale is only partially taxable and may even be shielded by non-capital losses, SR&ED ITCs or SR&ED expenditure pools within the company. When the proceeds are distributed, the company can elect to pay dividends from the CDA account.

While this works well for technology companies that have IP, it can also work for any corporation selling goodwill as well. Of course buyers will typically attempt to structure their purchase so that proceeds are allocated more to tangible assets which can be depreciated more quickly.



SR&ED Documentation




In recent years the Canada Revenue Agency (“CRA”) has increased the rigour of SR&ED reviews. 2 recent court cases (Highweb & Page Group Inc [2015 TCC 137] and Hypercube Inc [2015 TCC 65}) found in favour of the CRA on the basis that there was, amongst other things, insufficient contemporaneous documentation to support the claims.

Luckily these did not technically create a precedent as they were heard under the informal procedure rules. However it is clear that the CRA is looking for more and “better” documentation of a systematic approach to resolve technological uncertainties.

In the current environment claimants must keep regular, “contemporaneous” documentation of eligible work throughout the year.



A SR&ED project description must provide short answers to 3 questions:

1.  What technological uncertainties had to be overcome in order to achieve your ‘experimental development’ objectives? {maximum 350 words}

2.  What resources were applied systematically in the attempt to overcome these technological uncertainties (i.e. what was done)? {maximum 700 words}

3.  What was learned? {maximum 350 words}



In recent years the CRA has begun using these 5 questions as a guide to determining eligibility. Claimants must be able to answer YES to each of these questions:


  1.          Was there a technological risk or uncertainty which could not be removed by routine engineering or standard procedures? {introduces the concept of “routine engineering”}
  2.         Did the person claiming to be doing SRED formulate hypotheses specifically aimed at reducing or eliminating that technological uncertainty? {claimant must use a systematic approach and have a “theory” regarding how best to overcome the uncertainty}
  3.          Did the procedure adopted accord with the total discipline of the scientific method including the formulation testing and modification of hypotheses? {further emphasis on the importance of a systematic approach}
  4.        Did the process result in a technological advancement? {if steps 1 to 3 are followed there will necessarily be a technological advancement – since it will necessarily lead to new knowledge}
  5.       Was a detailed record of the hypotheses tested, and results kept as the work progressed? {the key to a successful claim is “contemporaneous documentation”}




According to the CRA:

development work that is experimental in nature and that is undertaken for the purpose of achieving technological advancement for the purpose of creating or improving existing materials, qualifies, but development work that is routine in nature does not qualify

Government of Canada News Release 92-088, December 2, 1992

If a qualified person (i.e. an engineer or technologist) can be reasonably certain of the outcome by simply applying known techniques in “the standard way”, there was almost certainly no eligible SR&ED.

In other words, if you GOOGLE the problem and can find detailed instructions or a YOUTUBE video, it is probably not eligible. In fact that is one of the first things that a technology advisor at CRA will do when reviewing a claimant’s project  description.

Having said that, some ‘out-of-the-box’ solutions don’t work and require extensive (and eligible) modifications to work within a claimant’s own technological environment.

When innovative companies attempt to make new or improved products they don’t purposefully set out to address technological uncertainties. Instead they seek to improve the features and the functionality of their products.

Too many claimants – when they write SR&ED project descriptions – focus on the new and improved products and features that they have successfully developed – and ignore the technological difficulties and challenges.

Eligible SR&ED only occurs when the developer overcomes (or fails to overcome) the technological uncertainties that were faced when developing the product. While it is often counter-intuitive for product development teams to focus on the challenges and problems that were encountered during the year, that is exactly what the CRA requires.

Product development that only contemplates a single ‘technological’ approach is unlikely to be eligible SR&ED.


There is a requirement that SR&ED claimants employ technically competent and qualified staff in order to claim eligible development work. If you’re performing eligible SR&ED you undoubtedly have someone competent on staff to lead the development work.

The identification of eligible technological uncertainties can require a great deal of subtlety. Often even competent technical staff have difficulty describing the uncertainties adequately. However most skilled development staff can describe possible alternative solutions to problems that they face. They are also well aware  when product development efforts stall, or hit roadblocks.

If your company is investing in product development and believe that it may be eligible, you’ll need to engage someone with sufficient professional competence to understand what “standard practice” is. What’s more if your product development plan only contemplates a single ‘technological’ approach, it is unlikely to be eligible SR&ED.

Claimant’s must employ a skilled ‘technologist’ to put forward the development plan

Claimant’s must employ a skilled ‘technologist’ to put forward the development plan and their plan should document what the technological uncertainties are (i.e. why they don’t represent standard practice) and what alternatives they are considering to overcome the uncertainties. This development plan should be done BEFORE work commences.

The development plan should be done BEFORE work commences.

Of course we all know that the “best laid plans….”

In any experimental development program unanticipated problems can arise throughout the year. These problems represent excellent evidence that technological uncertainties were present. All members of the development team should be enlisted to document problems and alert the rest of the team to their existence.

All members of the development team should be enlisted to document problems and alert the rest of the team to their existence.

This regular and ongoing documentation of issues is what the CRA refers to as CONTEMPORANEOUS DOCUMENTATION.


Problems encountered during development are a good indicator that eligible SR&ED was being done. The CRA prefers to see (and may insist) that documentation is “contemporaneous”.

In previous years they put forward the notion of “naturally-generated information” although they seem to have forgotten that idea in favour of the “total discipline of the scientific method”. However it is clear to us at least that it is more effective to use documentation systems that form a natural part of the development process.

If the documentation process is too cumbersome and ‘unnatural’ – perhaps designed by a well-meaning accountant strictly for compliance purposes – there is a significant risk that development staff won’t use it anyway.

Instead development teams should focus on tweaking existing documentation systems to accommodate SR&ED. For example software developers generally use source code repositories to record check-outs and check-ins of software code. These systems will often allow users to export check-ins/check-outs to a spreadsheet or comma separated value file. For software claims, these systems are often an excellent source of contemporaneous documentation.

Many development teams also use project management software to manage activities and assign resources to projects. These systems are widely used by engineering professionals in a great many disciplines in addition to software.

In the case of modifications to a manufacturing process there will almost certainly be trial production runs. These production trials are dated (i.e. clearly contemporaneous) and are themselves evidence of experimentation.

Most development teams have regular meetings to discuss the status of the work and the problems encountered. Recording these meetings and keeping notes is an excellent way to provide support for the fact that eligible SR&ED was going on – and who was working on it.

We recommend exploiting the existence of such systems and – where possible – to examine ways to extend their usefulness in providing documentary evidence for SR&ED projects.

Team leads and project managers should insist that development staff use capabilities to add comments to records within these systems, and provide a little rigour around their documentation efforts.

The CRA has long expressed a desire for timesheets to document SR&ED activities. While useful, it is important that development teams take this task seriously and put descriptive information in their time records. A half-hearted implementation of 3 different systems is less effective than ensuring that your primary documentation is sufficiently robust to allow SR&ED activities to be identified.

In essence SR&ED claimants must extend their accounting systems to allow for rudimentary activity-based costing (“ABC”). For small, private companies there is really no such thing as accounting software systems that incorporate ABC.

So the best alternative is to superimpose a form of activity-based costing, by referring to one or more of the development tools:

  • project management software
  • source code repositories
  • timesheet systems
  • production trial data

and derive rational cost allocations after-the-fact.

For small companies, a couple of useful approaches could include:

  1. document issues that arise in regular meetings of development staff
  2. send emails documenting development issues to a pre-assigned email address (eg.




Is Contemporaneous Documentation Essential?


2 Cases Decided in 2015 under the informal procedure rules:

  1. High Web & Page Group Inc. (2015 TCC 137)

  2. Hypercube Inc. (2015 TCC 65)

…each had a completely different result than “Les Abeilles”. Thankfully they were decided under informal rules and technically don’t set any precedent – more later


ORIGINAL POST – January 2015

A recent court case Les Abeilles services de conditionnement inc v. The Queen suggests that contemporaneous documentation is not essential in establishing that eligible SR&ED was performed.

Contemporaneous documentation

Justice Jorré clearly indicated that, despite the CRA’s claims, contemporaneous documentation relating to SR&ED projects is not an essential condition to benefit from the program:

[Translation] “Whether or not contemporaneous documents exist and whether or not the documents contain certain information are relevant to the Court’s determination of a question of fact. However, the existence of contemporaneous documentation, or contemporaneous documents with specific content, is not a condition for the scientific research or experimental development to be recognized.

The judge explained his thinking by referring to the words of Justice Archambault in 116736 Canada Inc.:

[Translation] “In 116736 Canada inc. v. Canada, [1998] ACI No. 478 (QL), Justice Archambault explained that contemporary reports of any testing are potentially very important evidence but they are not mandatory. He says the following:[…] In my view, contemporary reports showing detailed records of each experiment attempted by a researcher could constitute evidence of a systematic investigation. Any taxpayer attempting to convince the Minister that he is entitled to deduct R & D expenditures without such evidence puts himself in a very precarious position. A taxpayer would be in a similar position when appearing before this Court to contest the Minister’s refusal to allow the deduction of his R & D expenditures.However, the Act and the Regulations do not require that such written reports be produced in order for a taxpayer to qualify for the deduction of such expenditures: it is possible to adduce evidence by way of oral testimony. Whether the Minister or a judge could conclude that the activities purported to have been carried out by the taxpayer were actually carried out then becomes a question of credibility.” (Emphasis added by the judge).

The judge’s legal reasoning that the CRA cannot ask more from a taxpayer than what the law requires has recently been applied in other decisions. For example, in a decision involving claims for input tax credits (GST), Justice Tardif of the TCC also pointed out that the CRA must abide by the law in assessing the available proof:

With respect, regarding this interpretation, I question this position given that this condition is not in the Regulations; moreover, in tax matters, taxpayers cannot be required to do more than the obligations the Act imposes on them.”

This decision confirms that, although contemporaneous documentation is recommended, it is not essential to qualify for the SR&ED credit.

So where does this decision leave claimants?

At law, companies may be able to prove that eligible SR&ED was performed without contemporaneous documentation. However they are unlikely to convince the CRA without it. That would mean going to court and producing some other kind of evidence that is persuasive.

At a recent Stakeholders’ session in Vancouver, Helene Marquis of CRA indicated that they do not view this as precedent setting since it relies so heavily on a reading of the facts.

Ms. Marquis suggested that they were more interested in the judge’s findings on the credibility of their expert witness:

The CRA’s expertise

The parties each submitted an expert’s report on the disputed activities. The CRA called Steven Kooi as an expert witness, a CRA employee who acted as scientific during the audit of the Corporation. Although Mr. Kooi’s qualifications as an expert were not questioned by the parties, the judge nonetheless decided to give his testimony very little weight[5]. According to the judge, the fact that Mr. Kooi was employed by the CRA was not enough in and of itself to reject Mr. Kooi as an expert[6]. However, the Court said that it questioned Mr. Kooi’s impartiality given the disproportionate emphasis he placed on the CRA guidelines compared to his own expertise:

[Translation] “During his testimony and in his report, there was confusion between his role as a scientific adviser during the audit and his role as an expert witness.As a scientific adviser at the audit stage, it is quite normal for Mr. Kooi to be guided by the Canada Revenue Agency’s guidelines regarding scientific research and experimental development, including certain standards relating to the proof of facts the taxpayer must establish to satisfy the Agency.However, his role as an expert witness is different since it involves his personal expertise on issues such as whether there is technological uncertainty. An expert may agree with a recognized authority in an area but it must nonetheless be his own opinion.During his testimony and in his report, there were times when Mr. Kooi often seemed to be guided more by the Canada Revenue Agency’s guidelines and policies than by his personal expertise.”

This decision should therefore encourage the CRA’s experts to base their opinion on their own expertise rather than referring to the guidelines and policies of their employer, the CRA, in determining what activities qualify for the SR&ED credit.

It will be interesting to see how the CRA will react to this finding.


Differing Views of Innovation in Canada

Do concerns regarding the effectiveness of Canada’s SR+ED Program stem from an incomplete understanding of the state of innovation in Canada?

 As recently as September 9th of 2013, the Conference Board warned that “Canada’s economy is on a ‘path to mediocrity’ as innovation lags”. At about the same time the Startup Genome was reaching a much different conclusion. Their dataset was heavily skewed towards early stage startups. The report was co-authored by a number of entrepreneurs, included contributions from Steve Blank (Stanford University) and Ron Berman (UC Berkeley), and was supported by Telefónica Digital – a global business division of Telefónica S.A.

According to STARTUP GENOME study, Toronto, Vancouver and Waterloo are 8th, 9th, and 16th respectively in terms of their importance as global technology hubs. If this is true – and I expect that it is – it may be in large part due to our generous tax incentives. While the US dominates with 6 recognized technology hubs, Canada is clearly performing well with 3 in the top 20.

In their view the greatest challenge facing early stage technology companies is clearly access to capital for commercialization:


  • “If Toronto does not improve its funding climate, entrepreneurs may relocate to the nearby Startup Ecosystems of NYC and Boston where funding prospects are much better.”
  • “Toronto’s startup ecosystem is self-sufficient. However, policy makers can help closing the funding gap by attracting late-stage venture funds through tax breaks and incentives, and investor-friendly policies.”
  • “The funding climate for startups in Vancouver is insufficient, with startups receiving 80% less funding than startups in SV. They receive 72% less in Stage 2 (Validation) and 97% in stage 4 (Scale).  The late stage funding market basically doesn’t exist for Vancouver startups.”

Perhaps the Startup Genome’s perspective is different because they are closer to the action and focused more on start-ups than the Conference Board of Canada. Certainly companies at this very early stage lack resources and experience. As a result, in some ways they actually need more sophisticated help than their later stage counterparts.

In any event it is important to recognize our successes and I believe that Canada’s SR&ED incentive program continues to be a success. The emergence of Toronto, Vancouver and Waterloo as global technology hubs certainly owes a debt to the SR&ED program.

In recent years there has been a great deal of discussion about Canada’s inability to leverage our investment in R&D incentives to improve productivity. I believe that it is the lack of venture capital for commercialization that is the real culprit. However there are certainly some ‘intellectuals’ who have an almost religious aversion to government incentives of any kind. In fact we shouldn’t forget that our current prime minister is a former head of the National Citizens Coalition – a right wing ‘think tank’ that closely resembles the Tea Party in the US.


The SR&ED program was originally introduced by Canada’s progressive conservatives in 1985. At the time Canadians were viewed primarily as ‘hewers of wood and drawers of water’ and R&D was done in the corporate headquarters of US-based multinationals.

Recently concerns in Ottawa around the effectiveness of the SR&ED program culminated with the Jenkins Report that made the same mistake that the Conference Board made in September of 2013″

…from the Jenkins Report (2011):

“the panel believes the government should rebalance the mix of direct and indirect funding by decreasing spending through the SR&ED program and directing the savings to complementary initiatives strategically focused on serving the needs of innovative Canadian firms, especially small and medium-sized enterprises”

…from the Conference Board of Canada (2013):

“The federal government recognizes that, despite its high level of federal R&D support, Canada continues to lag other countries in business R&D spending, rates of commercialization of new products and services, and productivity growth”’

The notion of reducing or eliminating the $3.6 billion SR&ED program sits very well with a government that detests taxation – particularly leading up to an election year. But don’t hold your breath waiting for Jenkins’ “complementary initiatives strategically focused on serving the needs of innovative Canadian firms, especially small and medium-sized enterprises”. These kind of direct funding initiatives will clearly not make it before the election budget is delivered, since the beneficiaries are too far removed from – and misunderstood by – middle class voters that all politicians are trying to appeal to.

For traditionalists perhaps it is comforting to realize that Canada is once again becoming a primarily resource-based economy. We appear to have pinned our hopes on the oil sands in Alberta and liquefied natural gas in BC – to the dismay of manufacturers in Ontario and Quebec. Canadians can now choose to firmly embrace the 19th century and ignore those troubling ‘left-wing” notions of climate change and evolution – that our avowedly fundamentalist prime minister seems to have such difficulty with.